Monday, February 07, 2011

Markets in Everything: "Cash for Keys" in NYC

In New York City, there is a whole industry built around real estate developers paying tenants to move out of the one million NYC apartments that are still rent-stabilized. One tenant was able to squeeze $400,000 from an anxious developer for turning over the keys and moving out.

Yes, and I assume every party involved knew how the game is played. If a developer buys a rent controlled property, I must believe he knows what he is doing, and expects to pay to get tenants to move. If not, he soon won't be in that business. The amount may have been higher than anticipated, but it can't have been too high, or it wouldn't have been paid.

It's also possible that the developer feels that, overall, he got off cheap. We don't know much about this case. We are only reading about it because $400k seems like a large number.

Yes, and I assume every party involved knew how the game is played. If a developer buys a rent controlled property, I must believe he knows what he is doing, and expects to pay to get tenants to move. If not, he soon won't be in that business. The amount may have been higher than anticipated, but it can't have been too high, or it wouldn't have been paid.

The laws were applied to properties built before the legislation was passed so no, not every developer knew what was going on. But once the laws were passed the players had to adjust and we saw some interesting consequences that turned ordinary decent individuals into rent seekers looking for ways to game the system for a personal advantage. Owners skimped on repairs and made life a living hell for long time tenants hoping that they would leave and the returns on the property would increase as higher rents could be charged to new tenants. Existing tenants also played the game and made deals by subletting apartments and by doing so denying the owners of the properties the higher profits that they were entitled to.

I’m surprised that this is “news”; this process hit its peak in the early 1980’s and has been in decline since. Long ago the legislatures of the city and state deprived landlords of control of rents and tenancy; essentially confiscating part of the landlord’s property. What is amazing is that Federal Courts long ago rejected challenges to these takings under Article 5. In depriving the landlords of control New York basically transferred important parts of landlord property rights to tenants; hence the large prices to move out represent the lost value of landlord property rights. In recent years there has been some reduction in the scope of rent control; this was necessitated by the need to attract new development which is not yet subject to this inane process.

Every year we have a political circus here when the landlords association, the politicians and the tenants fight over the annual increase of rents. Some of the rhetoric would do Chairman Mao proud; you learn that anything can be rationalized in the political process, it is really quite scary. I’ve always been surprised that landlords did not murder their unwelcome tenants on a regular basis.